A Middle East conflict has pushed UK inflation to its highest level since December, complicating the Bank of England's path and threatening a new cost-of-living squeeze.
The UK's annual inflation rate climbed to 3.3 percent in March, up from 3.0 percent in February, as the war in the Middle East drove the largest monthly increase in fuel prices since June 2022, the Office for National Statistics reported Wednesday.
"The rise in CPI inflation... was almost entirely due to higher fuel prices and tells us little about whether the leap in energy prices will trigger 'second-round' effects on inflation," said Ruth Gregory, deputy chief UK economist at Capital Economics, who expects a "prolonged pause" from the central bank.
The primary driver was an 8.7 percent monthly surge in prices for fuels and lubricants. Since US-Israeli strikes on Iran began in late February, Brent crude oil has risen more than 30 percent. Core inflation, which strips out volatile energy and food, eased slightly to 3.1 percent from 3.2 percent in February, offering a sliver of comfort to policymakers.
The data places the Bank of England in a difficult position ahead of its meeting next week. While markets have priced out imminent rate cuts and now expect one or two hikes in 2026, policymakers must weigh the immediate impact of imported energy inflation against a weakening domestic economy, with the IMF recently cutting its UK growth forecast to just 0.8 percent for the year.
Fuel Prices Drive Headline Jump
The Office for National Statistics data detailed the sharp impact of the conflict on UK forecourts. The average price of petrol rose by 8.6 pence per litre between February and March, compared with a 1.6 pence fall during the same period in 2025. Diesel prices soared by 17.6 pence per litre.
The war's fallout has quickly become a political issue. Chancellor Rachel Reeves said the crisis was "not our war, but it is pushing up bills for families and businesses," while insisting the government's economic plan provides a strong position to offer support. In contrast, Shadow Chancellor Sir Mel Stride accused the Labour government of making the economy "vulnerable" through its existing policies.
While the headline rate was pushed higher by energy, economists are now watching for knock-on effects. "The real difficulty is the second-round effects that they won’t really get evidence for until six to 12 months down the line," said Jack Meaning, chief UK economist at Barclays. This is when it will become clear if higher energy costs are leading to bigger wage demands and broader price increases for goods and services.
Bank of England's Dilemma
The inflation spike upends forecasts from the start of the year, when the Bank of England projected inflation would fall below its 2 percent target in April. The central bank, which has held its benchmark rate at 3.75 percent, now faces a trade-off between tackling inflation and supporting growth.
Some rate-setters have signaled a hawkish stance. The bank's chief economist, Huw Pill, recently expressed skepticism over a "wait-and-see" approach, suggesting the bank should act quickly to tame price rises before they become entrenched, as some critics say it failed to do after Russia's 2022 invasion of Ukraine.
However, most analysts believe the bar for a rate hike is high. "Persistently weak domestic activity and a looser labour market imply that rate hikes are relatively less likely in the near term," said Martin Sartorius, Lead Economist at the CBI.
For households, the renewed inflation threat raises the prospect of further pain. Food inflation is expected to climb from its current 3.7 percent as higher energy and transport costs feed through the supply chain. Mortgage costs have also ticked up as lenders price in the expectation that the Bank of England will keep rates higher for longer.
This article is for informational purposes only and does not constitute investment advice.
